My husband and I withdrew about $4,700 from his IRA to cover a 5% downpmt on an $83,500 house (houses are easier to buy in Indiana than a lot of places!). We withdrew the extra to cover the taxes on the amount withdrawn.

We're closing tomorrow, and the actual we amount we'll be paying at closing after all the math is done will be just under $2,300 (the sellers are paying $1500 in closing costs, we get $800 in prorated taxes, etc.).

Is this a big "oops"? Was the first "oops" withdrawing more than we actually needed for the downpayment? Can we still avoid the 10% penalty? Do we need to sit down with a tax accountant now?

Thanks in advance for your sage wisdom, fellow Fools! I searched the discussion boards and perused the tax FAQ's, but didn't exactly see an answer to this one--forgive for being ignorant and possibly dense. Heh.

My husband and I withdrew about $4,700 from his IRA to cover a 5% downpmt on an $83,500 house (houses are easier to buy in Indiana than a lot of places!). We withdrew the extra to cover the taxes on the amount withdrawn.

We're closing tomorrow, and the actual we amount we'll be paying at closing after all the math is done will be just under $2,300 (the sellers are paying $1500 in closing costs, we get $800 in prorated taxes, etc.).

Is this a big "oops"? Was the first "oops" withdrawing more than we actually needed for the downpayment? Can we still avoid the 10% penalty? Do we need to sit down with a tax accountant now?

OK, when did you withdraw it? Can this qualify as a first house? ie Did either of you own a home within the past two years? If you're lucky you may meet the first homeowner's exemption, but people usually aren't that lucky. See page 20 of IRS Publication 590 to see if you meet those "first homeowner rules" otherwise, you owe the penalty.

If it's been less than 60 days since you took the funds out, you may be able to put the excess back under the IRA rollover provisions. There are other limitations - significantly, you can't have done another rollover in the previous year.

But time is of the essence here. You've got 60 days - no more. No extensions, no "oops I forgot", perhaps not even "my broker screwed up" (although I seem to recall a recent softening of this position in some cases - but I could be wrong).

If you're eligible to do a rollover - and actually do it! - you can avoid both the penalty AND the tax on any amounts returned to your IRA. That's why this is a critical question that Charlie asked.

My husband and I withdrew about $4,700 from his IRA to cover a 5% downpmt on an $83,500 house (houses are easier to buy in Indiana than a lot of places!). We withdrew the extra to cover the taxes on the amount withdrawn.

To add just a little to the previous responses, you'll be taxed on the total amount withdrawn and not rolled back into an IRA within 60 days of the disbursement. In addition, you'll owe the 10% premature distribution penalty on any amount above your qualified home acquisition costs. IOW, you'll pay a penalty on the money you withdrew to pay the taxes.

<If you're eligible to do a rollover - and actually do it! - you can avoid both the penalty AND the tax on any amounts returned to your IRA. That's why this is a critical question that Charlie asked.>

I don't mean to pick on the person who asked the question. After all it is always better to ask than not to ask. But why do so many people perform a transaction first and then ask about the consequences after the fact? I know IRA's can be very tricky and even our "pros" can get confused on some of the finer points. Still, I think that the original poster has been given the usual good series of answers here. Hopefully, there is still time for them to fix their mistake.

In addition to IRA questions after the fact, we see many questions from people who have sold stock but have no idea whether they have a gain or a loss because of poor record keeping. The lack of records can be of their own doing or caused by someone who has given them a gift of the stock. We have also seen people add names to the title of their houses "to make it easier" to pass the asset on later. Of course this can often result in a big unnecessary tax bill later on. Or it can result in the parent losing their home when the person added to the title goes through a divorce or has a judgement against them.

I guess my point is that major financial decisions or transactions should be entered into with at least some understanding of the potential consequences. If reaching that level of understanding involves getting professional advice, you may find the cost a small price to pay for avoiding a big mistake. Many times this board can help you on the way to learning what questions to ask or what to look out for. Sometimes we can use our mistakes to help you avoid making the same ones. The people on this board who regularly give their time are providing a great service to all of us with questions. They can be even more helpful if you seek their advice before taking an action.

[Quote from original message:]My husband and I withdrew about $4,700 from his IRA to cover a 5% downpmt on an $83,500 house (houses are easier to buy in Indiana than a lot of places!). We withdrew the extra to cover the taxes on the amount withdrawn.

[Reply:]To add just a little to the previous responses, you'll be taxed on the total amount withdrawn and not rolled back into an IRA within 60 days of the disbursement. In addition, you'll owe the 10% premature distribution penalty on any amount above your qualified home acquisition costs. IOW, you'll pay a penalty on the money you withdrew to pay the taxes.

Phil Marti

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Thanks to all those who replied. I'm the person who first asked--the silly person who, together with her husband, in the flurry of first-time home-buying did not get all of their facts or their synapses straight before making the IRA withdrawal. ::blush:: Normally I'm just fine with basic arithmetic as well as basic fact-finding, but this time I was swayed by home-buying anxiety (both mine and my husband's!). ::sigh::

Anyway, we closed on the house yesterday. Here is a refinement of my question.

1) Qualified costs include the downpayment, settlement, financing, and closing costs (we're not going to have to do any building or rebuilding). Our downpayment was $4175.00; settlement costs at closing totaled $1323.90. We'll be more than fine with those two figures combined: in fact, we withdrew less than that total.

However, the sellers gave us $1,500 in closing costs. Is that "counted" for the IRA withdrawal?

1a) Does the inspection we had done on the house (not required by our lender) figure as a "qualified cost"? That was $225.

2) If I understand your collective wisdom correctly, if we did withdraw too much we can simply do the math and then deposit the excess back into the IRA within 60 days of the disbursement and still avoid the 10% penalty.

Does the inspection we had done on the house (not required by our lender) figure as a "qualified cost"? That was $225.

I'd say that it does.

If I understand your collective wisdom correctly, if we did withdraw too much we can simply do the math and then deposit the excess back into the IRA within 60 days of the disbursement and still avoid the 10% penalty.

Not only will you avoid the penalty, you'll avoid having to pay tax on that amount - if there was any to pay.

How am I doing now? :)

Much better, I trust.

Oh - your first question.However, the sellers gave us $1,500 in closing costs. Is that "counted" for the IRA withdrawal?

I'm not sure, to be quite honest. If the final settlement accounting describes it as seller paid costs, or something to that effect, I'd say that it reduces your eligible expenses. If it is more general description, like seller allowance, then I'd argue that it was a reduction in the price of the house, not a reduction in your eligible expenses. But it sounds to me like it won't matter, anyway.

Another thought - if before the 60 days is up, you find that you have some extra cash (OK - when you stop laughing, keep reading), you can put that back into the IRA as well. You'll cut down the income taxes due on the withdrawl (even thought it might already be penalty-free) and keep more of your retirement savings intact.

In mid-June BW and I decided we would sell some of our stock to pay off our CC & SL debt and become debt free. But, "wait," said I. We should build a spreadsheet first and optimize which stocks to sell off so that we can minimize our taxes. The good news is, I have a pretty cool looking spreadsheet now, 4 months later, and I think that I am pretty well versed in tax law for stock purchase plans. The bad news, is that most of the stock took a 20% hit in the time it took to do research and build the spreadsheet.

The moral of the story? I don't think there is one. I think it's just one of life's little ironies.